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In re SCANA Corporation Derivative Litigation

United States District Court, D. South Carolina, Columbia Division

June 27, 2018

In re SCANA Corporation Derivative Litigation

          ORDER AND OPINION

          MARGARET B. SEYMOUR SENIOR UNITED STATES DISTRICT JUDGE.

         Plaintiffs Colleen Witmer and Richard Wickstrom filed a consolidated and amended shareholder derivative complaint on January 30, 2018, against Defendants Kevin N. Marsh, Gregory E. Aliff, James A. Bennett, John F.A.V. Cecil, Sharon A. Decker, D. Maybank Hagood, Lynne M. Miller, James W. Roquemore, Maceo K. Sloan, Alfredo Trujillo, Stephen A. Byrne, and Jimmy E. Addison (“Defendants”), and against Nominal Defendant SCANA Corporation, a South Carolina Corporation (“SCANA”). Plaintiffs seek to redress harm to SCANA stemming from Defendants' alleged breaches of fiduciary duties that, according to Plaintiffs, resulted in the abandonment of two nuclear reactors at the V.C. Summer Nuclear Generating Station near Jenkinsville, South Carolina. Plaintiffs contend Defendants' actions caused SCANA to lose billions of dollars and exposed SCANA to civil and criminal liabilities. More specifically, Plaintiffs contend that Defendants breached their fiduciary duties to SCANA “by, among other things, overseeing, sanctioning, and participating in the grossly mismanaged Nuclear Project; purposefully concealing material information about the Nuclear Project, including findings of the Bechtel Reports, [1] from regulators and the public, in violation of state and federal law; consciously disregarding the many red flags related to the Nuclear Project's inevitable failure; failing to maintain proper internal controls; and accepting incentive compensation tied to their management of the Nuclear Project.” ECF No. 65, ¶ 24. Plaintiffs state that SCANA has been forced to accept a takeover offer by Dominion Energy, Inc. (“Dominion”) at a “fire-sale price.” Id. ¶ 26. Plaintiffs bring causes of action as follows:

1. Count I: breach of fiduciary duties against Director Defendants (Aliff, Bennett, Cecil, Decker, Hagood, Miller, Roquemore, Sloan, Trujillo, Micali, and Stowe[2]) because they allegedly oversaw, endorsed, and participated in the gross mismanagement of the project; ignored or consciously disregarded red flags; deliberately concealed material information from regulators and the public; failed to maintain proper internal controls; accepted incentive compensation tied to their management of the project; wasted corporate assets by continuing to construct the project, when they knew or should have known that SCANA, rather than South Carolina ratepayers, would ultimately be responsible for imprudent expenditures; made and allowed SCANA to make false and misleading public statements, which resulted in the artificial inflation of SCANA's share price; allowed for inadequate risk controls over the company's policies and practices; engaged in abuse of control and gross mismanagement of SCANA's assets; failed to adequately exercise their special oversight duties (Nuclear Oversight Committee members); approved incentive compensation under false pretenses of successful management of the project (Compensation Committee members); failed to nominate directors with qualifications relevant to overseeing a nuclear construction project (Nominating and Corporate Governance Committee members); and failed to fulfill their duties to ensure that SCANA issued accurate statements about the nuclear project and to properly fulfill their risk management duties (Audit Committee members).
2. Count II: breach of fiduciary duties against Officer Defendants (Marsh, Byrne, Addison). Plaintiffs contend Officer Defendants breached their fiduciary duties by endorsing, overseeing, and participating in the project, which breaches caused harm to SCANA.
3. Count III: unjust enrichment against Defendants. Plaintiffs allege that Defendants were unjustly enriched and the expense of and to the detriment of SCANA by receiving excessive compensation and bonuses due to the ongoing and pervasive violations of law at the company.

         Plaintiffs seek an order awarding damages in an amount sustained by SCANA as a result of Defendants' wrongdoing; directing SCANA to take all necessary actions to reform and improve its corporate governance and internal procedures to prevent a repeat of the damaging events described in the complaint; awarding to SCANA restitution from Defendants and ordering disgorgement of all profits, benefits, and other compensation obtained by Defendants; and awarding costs and disbursements, including reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses.

         This matter is before the court on motions to dismiss filed by (1) Addison on February 23, 2018; (2) Byrne on February 23, 2018; (3) Marsh on February 23, 2018; and (4) Aliff, Bennett, Cecil, Decker, Hagood, Miller, Roquemore, SCANA, Sloan, and Trujilo on March 23, 2018. Plaintiffs filed an omnibus response to all motions on March 9, 2018, to which Aliff, Bennett, Cecil, Decker, Hagood, Miller, Roquemore, SCANA, Sloan, and Trujilo filed a reply on March 13, 2018; and Marsh, Byrne, and Addison each filed a reply March 14, 2018. All Defendants assert that the amended complaint fails to comply with the requirements of Fed.R.Civ.P. 23.1(b)(3), in that Plaintiffs do not demonstrate why demand for relief directly to the Board of Directors would be futile. Addison further moves pursuant to Fed.R.Civ.P. 12(b)(6) for dismissal for failure to state a claim upon which relief can be granted. The court turns first to Rule 23.1(b)(3).[3]

         DISCUSSION

         A. Motions to Dismiss under Fed.R.Civ.P. 23.1(b)(3)

         The derivative form of action permits an individual shareholder to bring “‘suit to enforce a corporate cause of action against officers, directors, and third parties.'” Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991)(quoting Ross v. Bernhard, 396 U.S. 531, 534 (1970)). The purpose of a derivative action is to place in the hands of the individual shareholder a means to protect the interests of the corporation from the misfeasance and malfeasance of faithless directors and managers. Id. (quoting Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)). To prevent abuse of this remedy, the shareholder must first demonstrate “‘that the corporation itself had refused to proceed after suitable demand, unless excused by extraordinary conditions.'” Id. at 95-96 (quoting Ross, 396 U.S. at 534). Consequently, Rule 23.1(b)(3), which governs the pleading requirements in derivative actions, states that a plaintiff's verified complaint must:

(3) state with particularity:
(A) any effort by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members; and
(B) the reasons for not obtaining the action or not making the effort.

         A court entertaining a derivative action . . . must apply the demand futility exception as it is defined by the law of the State of incorporation.'” In re World Acceptance Corp. Derivative Litig., Lead No. 6:15-cv-2796-MGL, 2017 WL 770539, *6 (D.S.C. Feb. 28, 2017)(quoting Kamen, 500 U.S. at 108-09. The South Carolina Supreme Court and South Carolina Court of Appeals have indicated Delaware law is persuasive in assessing demand futility. Id. (citing Carolina First Corp. v. Whittle, 539 S.E.2d 402, 407 (S.C. Ct. App. 2000) (noting South Carolina has adopted Fed.R.Civ.P. 23.1(b) procedurally, but applying Delaware law in analyzing demand futility)).

         There are two tests for determining demand futility under Delaware law. The district court in In re World ...


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